Compliance officers see growing risk in international sanctions

26 January 2018 by Rebecca Palser

Political uncertainty and technology contribute to one of this year's biggest business risks

One of the biggest problems compliance professionals face is keeping abreast of new regulations. It has featured as a top priority every year that our ‘Compliance Horizon’ survey has run, and is especially difficult in the field of sanctions.

This year, close to 45% of compliance professionals voted international sanctions as the single biggest external risk to their business.

There are many reasons why sanctions pose such a challenge for companies, but the nature of the regimes is probably the single biggest issue – requirements are imposed by various different countries and supranational bodies, but they do not necessarily align.

This creates tension for companies operating internationally, which need to make tough decisions about the standards they are going to apply and how they are going to monitor this across the business.

Russia

Constantly-changing regimes make life difficult for in-house compliance teams. Their task is to keep abreast of all the new regulations and their impact on the business, so that they are able to make the right decisions in very fluid situations. A case in point is the US sanctions regime against Russia.

On 2 August 2017, President Donald Trump signed into law the Countering America’s Adversaries Through Sanctions Act (CAATSA). The announcement set off alarm bells for wealthy Russian business figures and their advisers.

They were concerned because Section 241 of CAATSA requires the US Department of the Treasury to produce a report, and ultimately a list of names, which could be targeted with new sanctions.

The report, which is expected to be sent to the US Congress by the Treasury before the end of January 2018, will contain a list of potential targets who are either ‘the most significant senior foreign political figures and oligarchs in the Russian Federation, as determined by their closeness to the Russian regime and their net worth’ or ‘Russian parastatal entities’.

“Companies operating in countries where sanctions are in place need to monitor developments carefully so that they can be proactive rather than reactive”

While there are ongoing discussions about changes to the sanctions regimes, built-in periods of uncertainty such as this are clearly unwelcome. For businesses and professional advisers working with Russian high-net-worth individuals or parastatals, the uncertainty can significantly disrupt their business.

As a result, many have been following the situation closely and are starting to analyse who might be targeted by the sanctions so that they can begin to assess their exposure.

Political uncertainty

A lot clearly hinges on the political situation – as it so often does – and companies operating in countries where sanctions are in place need to monitor developments carefully so that they can be proactive rather than reactive.

In the case of Russia, even if Trump wants to improve US-Russian relations, the majority in the US political elite think differently. They are of the view that Russia is the largest threat to the existing world order and that the source of this threat is President Vladimir Putin.

They also believe that the Russian economy is fundamentally weak and if significant players in key industries are cut off from international markets and from their personal and corporate foreign assets, they would be persuaded to turn against the regime.

The Americans think that oligarchs and officials in the parastatal entities could be persuaded to intervene, at the most senior possible level, in Russian politics.

Therefore, those are the criteria against which all potential candidates for the CATSAA list need to be assessed. Analysing which of their counterparties meet these criteria will help organisations determine where the risk lies and what impact it will have on their business.

Worries for financial sector

We believe that the CAATSA list is likely to most worry the financial sector, particularly in the UK, which has the strongest connections to large Russian companies and rich people, as well as global investors in Europe.

Based on our analysis of the drivers for the potential new sanctions and our understanding of the Russian market, the report and accompanying list is likely to target businessmen and oligarchs who are deemed to be close to Putin. However, the US’ underlying agenda means that the list of targets could be broadened to include all senior officials.

It is not yet clear which oligarchs will be named or how many of them, but if the intention is to increase pressure on the Kremlin, the businessmen who had significant transactions with the state during the Putin era – for example, those who may have sold assets to parastatal entities – are probably in the firing line.

CAATSA also turns the spotlight on to those Russian businessmen who have banking, securities, insurance, and real estate interests in the US, and they are likely to be on the list too.

Iran

Alongside Russia, the evolving situation in Iran will remain a concern in the year ahead. Trump waived the sanctions against Iran in mid-January 2018 and has called again on Congress to ‘either fix the deal’s disastrous flaws, or the US will withdraw’ from the agreement, which next comes up for renewal in May.

This was echoed by US Vice President Mike Pence, who said on 22 January that Trump’s decision to waive sanctions in mid-January was ‘the last time’. He added: ‘Unless the Iran nuclear deal is fixed, President Trump has said the United States will withdraw from the Iran nuclear deal immediately.’

We expect renewed efforts by the Trump administration to encourage the EU and European signatories to the nuclear deal to support this stance on Iran’s activities in the region. However, we believe it is likely that the other signatories will prevent the deal from collapsing completely.

The US and its allies in the Gulf will probably continue to pursue a wider strategy to sanction Iran’s ballistic missile programme and target its proxies in the Middle East.

“It is vital to ensure that sanctioned individuals are not directly or indirectly benefiting financially from the business”

The US administration has also said that it intends to broaden the targets of its economic sanctions. Indeed, earlier this year, a State Department official said that the administration was considering targeted economic sanctions on individuals in the Iranian government in response to the violent crackdown on protesters in December and January.

At the moment, this creates a lot of uncertainty for companies investing in Iran. Should the US sanctions be reintroduced, they are extraterritorial, meaning they will affect EU companies taking advantage of the business opportunities in Iran.

Those businesses – predominantly in oil and gas, banking, financial services, precious metals, energy and the automotive industry – will be hoping that the EU introduces blocking sanctions, which will shelter EU businesses from the US sanctions on the grounds that the latter affects the sovereignty of EU countries.

Hidden figures

Monitoring changes to sanctions regimes and the larger political landscape is important, but it alone will not determine where a company’s risks lie. The other piece of the puzzle is for companies to understand exactly who they are doing business with.

This means knowing who key principals are, and who ultimately controls the company. Identifying the controlling shareholders is not always easy, but it is vital to ensure that sanctioned individuals are not directly or indirectly benefiting financially from the business.

The ultimate beneficial owners’ identities may be hidden under the guise of offshore ownership structures, for example, or a sanctioned individual or entity might exercise control indirectly. Only companies that have invested the time to understand properly who they are doing business with will be in a position to identify those risks. This requires a huge amount of data collection from business partners.

Many companies’ systems are not robust enough to manage this efficiently, and compliance teams are increasingly turning to other technology. Indeed, 59% of the respondents to our recent Compliance Horizon survey said that they expect to use compliance technology more in 2018 than they have before.

Compliance professionals are looking to leverage the efficiencies, as well as the transparency and traceability, that new technology offers, in order to help them protect the business. They have a lot to gain from doing so.

Technology can make quick and effective reporting more straightforward, giving compliance professionals oversight of the data they hold on their business partners at any given time. This makes it easier to identify any exposure to changes to the sanctions regimes.

However, the real benefit of new technology is in automating routine, day-to-day tasks needed to collect data on third parties. It can even be used to flag changes to an individual’s status. By improving efficiency, technology frees up compliance teams to take a more strategic view of risks on the horizon.

In the context of sanctions, this means that businesses can spend more time assessing the evolving political landscape so that they are aware of events that might lead to changes in the sanctions regime.

It also allows compliance professionals to spend more time considering how best to address any issues that arise from their analysis and to work with the business to find a solution.

However, although technology is improving all of the time, the best compliance programmes combine old and new. They leverage technology to free up time for compliance teams to focus on the thornier issues, which still need creative human intervention.